Bonus Depreciation Expansion for Nonresidential Buildings
Many of you have probably heard us advising on the benefit of bonus depreciation for many years now. The advantage of being able to accelerate depreciation for new fixed assets based on 50% of the cost basis in the first year of service has been around for many years now, and we have all grown accustomed to this great tax benefit. However, not all new fixed assets are eligible for bonus depreciation. That is why we are excited to share that effective with the 2016 tax year, the PATH Act has expanded bonus depreciation to include “qualified improvements” to any nonresidential building.
To meet the definition of a “qualified improvement” it broadly includes any internal building improvement expenditure that isn’t attributable to an elevator, escalator, building enlargement or internal structural framework that is incurred after the building has been placed in service. Without the benefit of bonus depreciation, this type of expenditure would be limited to a pro-rata deduction over the normal 39-year life. Therefore, the acceleration of tax savings under bonus depreciation significantly lowers the real economic cost of the improvement.
One thing to bear in mind is that the availability of bonus depreciation for all types of eligible property is scheduled to be phased out. The general rule is 50% bonus depreciation will be available for property ready for use in 2016 and 2017, 40% for property ready for use in 2018 and 30% for property ready for use in 2019. Currently, there is no bonus depreciation available after 2019.
Due to the limited window for this tax benefit, if you foresee the need for interior building improvements to your nonresidential building, you should consider accelerating the improvements for tax planning purposes. Please feel free to contact us at your convenience to discuss the best tax planning strategies for your situation.